The Goods and Services Tax (GST) is considered to be one of the biggest tax reforms in India.The goal of GST was to simplify and streamline the taxation system in the country. This tax incorporatesmany indirect taxes such as Value Added Tax (VAT), excise duty and service tax.

Like any other major reform, the introduction of GST meant a great degree of ‘change’. Companies all over the country had to adapt to a totally new tax structure.

One of the major focus areas under the GST regime is how companies would manage their working capital.Let’s find out.

What is Working Capital?

Working capital is the money used by a company to take care of its day-to-day operations. In other words, it can be described as the fuel on which a company runs. Working capital is absolutely essential for a company’s short-term health and well-being. This is because even if a company has huge long-term assets, it can find itself in a tight spot if it doesn’t have enough money to manage its day to day operations.

How GST impacts Working Capital?

While the GST implementation offers many positives, there are a few challenging aspects as well. For example, under the GST regime, services are taxed at 18%. This is much higher compared to the 15% tax rate under the previous tax laws. This additional tax component means that service-based companies need to increase their working capital requirements under the new regime.

Tax Payment Timeline

Previously, companies had different timelines for tax payments based on the different taxes levied such as the VAT, excise duty and service tax. However, under theGST, companies have to pay a consolidated tax at once. As a result, firms need to manage their working capital accordingly, so that they don’t have a problem with cash outflows when it is time to pay tax. Different aspects like reverse charges, interstate sales and exempted supplies need to be considered when calculating the amount of GST payable. There are many GST calculators online that help small businesses calculate the total amount payable at the time of filing tax returns.

Input Tax Credit

Under the previous tax structure, companies could benefit from input tax credit only on items that had a link to a taxable output. However, under the GST structure, companies can claim input tax credit even on services that help facilitate business growth. This includes marketing and advertising costs borne by the company. This additional tax relief can help a company utilise their finances in a better way.

Free Movement of Goods Across Borders

Under the previous tax laws, companies had to pay additional taxes for shipping goods across state borders. As a result, many companies opted to establish multiple warehouses in different states to avoid paying extra taxes. But on the flip side, companies had to comply with the different tax laws in each state that they were located. In addition, the cost of managing these warehouses increased their operational costs and working capital needs.

With the introduction of the GST, companies don’t have to deal with Central Sales Tax (CST), entry taxes or Octroi. GST enables the free flow of goods across state borders. This means companies can minimise their working capital needs and improve efficiency.

Conclusion

These are some of the important scenarios where GST impacts a company’s working capital. It has been a little over a year since the implementation of GST has come into effect. By now, a lot of companies have rebounded from the lows of the GST implementation. However, it is still very important to keep track of the company’s working capital needs and ensure that there is a healthy balance between the company’s current assets and liabilities. If you find it difficult to keep up with your working capital needs, you can opt for a business loan to funds it.